Monthly Archives: September 2013

The capacity of Irish policy makers and commentators to self delude and fail to learn from bitter experience is positively Bourbonic. When Morgan Kelly published his now famous piece on the state of Irish banks and the economic winter that would follow on their inevitable collapse he the first and only Cassandra. Others had vague misgivings and generalised anxiety, his vision was clear and precise. He saw Troy’s towers consumed by conflagration. Yet five years and still there is absolutely no sense that anyone in Government or in the commentariat understands or, which is worse, wants to understand what the fundamental flaw that split asunder the Irish economy. It is much easier to invent bogeymen and wicked capitalistic buggaboos that face up to the truth. However blaming developers, bankers, speculators and Fianna Fail though morally satisfying in no way advances our understanding or prevents us from making precisely the same errors again.

From the foundation of the state until 1979 the Irish pound was linked to sterling. We floated for thirteen years until EMU in 1992 and then finally abandoned the Punt for the Euro. Many have argued that we entered at too low a level and that was the start of our downfall. But having been crucified on bank rates of the high teens and twenties the low interest of the EMU and then the Euro seemed to Irish business and home buyers as a very Canaan. Rates set to meet the needs of the European heart, especially Germany, meant that an economy alreqady growing strongly had access masses of cheap and easily available capital. Money was cheap for a long time. Ireland was under capitalized, under invested, lacking in infrastructure, highly productive, competitive, low taxed and low waged. It had historically underperformed and was now engaging in catch up. However once under the capitalised slack had been taken up increases in productivity were needed to maintain further money growth without inflation.

Now one of the real failures of government, and this is not peculiar to ours, is that all the talk about controlling inflation was mono-maniacally obsessed only with CPI and regarded asset inflation as neither a symptom, a warning, or a problem. For many years our CPI was very low and even in the mid naughties when it was seen to be growing above the desired limit it was low compared to the level endured during the seventies and eighties. Somehow we have accepted the notion that the increase in the price of goods, and services and commodities is bad except when it comes to PROPERTY. What is particularly pernicious about property and associated asset inflation is that it draws capital away from productive and creative enterprises. The Irish experience of the last two decades is a case study of how mispriced credit over an extended period will produce irrational investment choices and distort both our sense of risk and time when we make investment decisions.

Once upon a time there was a small investment bank in Dublin called Anglo Irish Bank. It was a perfectly nice and old fashioned house. Then a thrusting young man came along and exploited brilliantly changed market conditions and the flexibility of fractional reserve banking. In fifteen years he would grow the bank to be jointly the second largest bank in Ireland. He was let us not forget lionised in the press and corridors of power. Also remember that it took some years for the two big banks to start on the property ladder. They changed their previously prudential lending practices when non Irish banks appeared on mortgage markets. They, and their shareholders, saw the incredible growth of Anglo and it was perhaps inevitable, nothing else impeding it, that the retail banks ended up copying the Anglo model. What made it worse was the fact that coming late to the party they ended up those last years of the boom being even more risk insensitive than Anglo.

BUT as Morgan Kelly has shown what we had in Ireland was not primarily a property bubble. Not even an asset bubble. It was a credit bubble. Our banks fed the fire of cheap and easy credit with money which they borrowed at emergency rates from German banks full of money but short on customers. Why then are we the only ones to be scolded and punished for reckless banking? Did the German banks not lend in a reckless fashion to shaky banks with a crazy exposure to the possibility of a property crash? With risk comes reward, and also sometimes pain. We shall see if they are enforced to endure any pain. Well as always something occurs, asymmetric shock, collapse of asset values and all that, and the debt begins to unwind. And then chaos.

There was one necessary condition for the credit bubble to occur in Ireland. THAT WAS BANK RATES WHICH WERE NOT CONSISTENT WITH THE STATE OF THE IRISH ECONOMY. Money was too cheap. It suited economies growing at one or two per cent, but not one growing at ten per cent. Without the ability to dampen inflation with appropriate interest rates the government failed to use the fiscal tools it had to manage growth. It also failed to use the regulatory tools it had to control bank lending and to maintain healthy reserves and diversified loan books.

BUT I am not sure in the end if Irish banks had tried to stay out of the market it would not have ended up in the same place. Foreign lenders, regulated outside the sate and competing in the market would have driven lending, and faced the Irish banks with the choice of losing their home market or competing on level terms with these non national banks. The damage might have been mitigated, but there would still have been a horrible crash.

Unlike some of my friends I am also sceptical about the capacity of politicians using only fiscal levers to control this kind of credit expansion. No doubt it could have been handled better, and on the fiscal/budgetary side glaring mistakes were made. However, it is my opinion, only that, when we have an expansion of credit as large as ours over an extended period then a bubble is inevitable. And such an expansion will always occur when money is too cheap. Cheap money confuses, it distorts risk and our sense of return. It discombobulates every thing economic.

I am loathe to say it. I really am. I want there to be a solution. However I think that most of you reading this will have guessed my conclusion. As long as our economy is not in the same business cycle as Germany then we will have to endure bank rates that our not appropriate to this economy. It will always be an accident that what are the right interest rates for Germany will be the right ones for Ireland. I see no reason to believe that we will soon be able to be in cycle. In fact the danger is that next year higher inflationary pressure in Germany will lead to creeping increases in the base rate. At precisely the time we need a loose monetary policy the ECB is going to begin what may have to be a tightening process for a couple of years.

Miises, Hayek, coffee cup

While we have been victims of some very bad government we are also victims of a currency which we cannot control – whose value and price is ditermined in Germany not here. An economy which is counter cyclical with its own currency is in trouble. We are in trouble. We have to find a way out.

It is generally recognised that more saving takes place in communities in which the distribution of wealth is uneven than in those in which it approaches more closely to modern conceptions of what is just.

Richard Miller

“Grief is the price we pay for love” said the Queen of England as she struggled to make sense of the outrageous crimes that took place twelve years ago today. Grief then must be at the centre of our thoughts today- grief for those who we lost – and grief too for the loss of what they would have achieved had they not been taken from us. But like patriotism, grief is no longer enough.

Ours is a grief that must be limited by hope, shaped by reflection, and overcome by prudence. 9/11 was and remains as much a challenge not only to our characters but to our intellects. We pay no tribute to the dead by retreating into hatred or crazy conspiracy theories.

It is sometimes claimed that there is nothing to be said in the face of death. This website is not a place where such assertions can be confronted at length. But let me simply say that I for one am confident that the promises of all the worlds’ religions have not been made in vain.

However the death of thousands in such circumstances does not simply concern individuals. It must also give rise to questions about the circumstances which brought about the event in which they died – which our sorrow, our anger, and our grief, must not prevent us from asking.

What should our response be to the rise of a terrorism grounded in Islam- a terrorism that is still a threat to others and to ourselves?

We need- I suggest- to decide how far, if at all, we should sacrifice our civil liberties- hard won since the seventeenth century- in order to make future attacks less likely?

We also need to ask how our defences should be changed in the light of the threat posed by Islamic terrorism, and tight budgetary conditions?

We need also to consider whether or not the foreign policies of The United States, The European Union, and The United Kingdom, should be changed to reduce the terrorist threat? For example should Turkey be welcomed into The European Union as a secular state; or excluded as an Islamic one?

This naturally leads to a consideration of

how far how the terrorism we are concerned with is caused by the nature of Islam, or the social and economic conditions in the Middle East?

If the social conditions are to blame, how can we best alleviate them? By working with the local elites, or by promoting democracy and capitalism more vigorously? Or should we adopt some combination of these approaches? And if so what should it be? And above all what part should military intervention in the Middle East have in the promotion of our our goals?

If we are serious about promoting stability and prosperity in the Middle East we must ask ourselves some hard questions about the future of Israel. Is Israel an important model of the rule of law and democracy in an unstable region? Or is its very existence the cause of, or at least a contributory factor to, the threats that we face? And if so should we modify our support for Israel in response to these threats? Where, in this respect, does prudence end and cowardice begin?

We need also to ask if Israel is an important, even vital, place of safety for the world’s Jews? Or has it become a place of danger in which they are trapped in an environment that will always be hostile?

The best eulogy that we can pronounce over the graves of those who were murdered on that terrible day twelve years ago is to ensure that our discussions of these troubling issues are informed, wide ranging, and courteous. It is only by having such debates that we can we decide what is best to do, and so avoid discovering that folly is the price we will pay for our thoughtlessness.

There is no justification for the belief that so long as power is conferred by democratic procedure that, it cannot be arbitrary; the contrast suggested by this statement is altogether false; it is not the source but the limitation of power which prevents it from being arbitrary. Democratic control MAY [emphasis in original] prevent power from becoming arbitrary, but it does not do it by its mere existence. If democracy resolves on a task which necessarily involves the use of power which cannot be guided by fixed rules, it must become arbitrary power.

There was a times in the spiritual attitude of Jesus a certain quality of remoteness and detachment from the social problems which were presented to his mind…There was political oppression about him to be remedied, there were social unrighteousness and iniquity to be condemned; but Jesus does not fling himself into these social issues of his time.

The essence of a thing is that which its definition signifies. This is identical with the thing of which it is the definition, unless per accidens something is added to the thing defined over and above its definition. Thus whiteness added to man, over and above the fact that he is a rational and mortal animal. Hence rational and mortal animal is the same thing as man; but whiteness, so as it is white, is not the same as man.